Fully booked

It is not easy being in the infrastructure business these days. Regulatory hurdles, rising costs and the general slowdown add up to a triple whammy. So what is Pratibha Industries doing differently? The Mumbai-based infrastructure company had an order-book target of ₹6,000 crore for FY12, which seemed rather ambitious given the general economic climate, but now, it appears set to close the fiscal with orders worth ₹6,567 crore. The irony is hard to miss. Every infra company is struggling to get orders but Pratibha is overbooked for the year.

But first, what is Pratibha Industries all about? Chaplinesque line drawings introduce this little-known company on its website rather charmingly, belying the broad sweep of its ‘one-stop-solutions’, from tunnelling, roads and bridges to modern townships, airports and railways stations. There is, though, a more mundane reason for Pratibha’s insulation from the slowdown — water and sanitation projects. A significant part of the new orders worth ₹3,350 crore have come from the water and housing segments.

Rohit Katyal, wholetime director, says the probability of getting projects is higher in engineering procurement and construction (EPC) compared to build-operate-transfer (BOT) road projects. “We have been focusing on EPC in water based projects, where competition is limited to six or seven players.” Water projects make up more than 60% of Pratibha’s order book, while the rest is from airports, construction of buildings and urban infrastructure projects (see: Repeat business).

High mark

Analysts say the company has seen consistent growth in its order-book. A report by brokerage firm, Sushil Finance, notes that the order-book has seen over 30% CAGR over the past four years — from ₹2,000 crore in FY08 to ₹6,500 crore in FY12. Backed by the strong execution of its projects, Pratibha posted a 19% growth in revenue in H1FY12. Analysts also like the company for its presence in the high-margin water segment. 

Pratibha’s order-book to sales ratio, indicative of its revenue visibility, is one of the highest in the industry (see: Healthy as ever). “The current size of order-book will be able to generate revenue for nearly 11-12 quarters,” says Suhani Patel, analyst, 

Pratibha makes operating margin of 13-14%, which the company believes it can sustain. “We believe we should continue with these margins, given that there is no shift in the nature of the projects we do. Also, 95% of our projects have a price escalation clause, which protects us from commodity price increase,” says Katyal. That’s another reason why Pratibha is an island of calm in a sector beset by that sinking feeling.

Happy year ahead?

In FY12, Pratibha expects a 25% year-on-year growth in revenue, backed by the big-ticket projects it has won recently. “Work on the Delhi Metro project has already started,” Katyal says. “We are on schedule (May 2014 completion) and we will recognise about ₹25-30 crore revenue this quarter (Q4FY12).” Pratibha’s 80:20 joint venture with China Railway First Group in May 2011 won a ₹467-crore project to design, engineer and construct two sections of twin underground tunnels for Delhi Metro’s phase 3. 

The other revenue grosser will be the ₹1,249-crore Delhi Jal Board project for laying interceptor sewers along three major drains in Delhi to reduce pollution in the Yamuna. Pratibha bagged this contract in July 2011 in a 60:40 partnership with Russia-based Mosinzhstroi Open Joint Stock Co. “The entire survey has been completed for Delhi Jal Board and the design portion is also 80% complete,” says Katyal, adding that the company should be able to finish design by the end of January. The orders for equipment have been placed and an estimated ₹15-17 crore in revenue should start flowing in this quarter (Q4FY12). 

Occupational hazard

Over FY06 to FY11, while revenues saw a 48.8% CAGR, net profit too clocked a healthy CAGR of 42.2%. However, net debt increased from ₹377 crore in FY11 to ₹650 crore now. “Working capital went up as the company began work on its Delhi Jal Board and Delhi Metro projects,” says Teena Virmani, analyst, Kotak Securities. “Till the time the projects are executed, working capital may remain high.” 

Because of stiffer rates, the company’s interest expense, as a percentage of operating profit, in H1FY12 was also high at 42%. Katyal says 28-30% of this is bank guarantee charges, letter of credit discount charges and performance guarantees for equipment purchases. “This is unavoidable when we take on new projects.” 

Nevertheless, a key positive for Pratibha is a lower working capital cycle than its peers. The company’s debtor days (the ratio that measures how quickly cash is collected from debtors) is 45 days, while its net working capital cycle is 145 days — which compares very well with the industry average of 200 days. “As Pratibha has bagged orders from reputed clients like Tata Housing and state governments like Delhi and Gujarat, there is no delay in payments from clients,” says Networth’s Patel.

Meanwhile, Pratibha is looking at reducing its debt and improving profit margins by offloading its saw pipe manufacturing business, a ₹120-crore in-house division located at Wada, in Maharashtra. It is used for captive consumption in its water management projects. “We have been experiencing an oversupply in saw pipes,” says Katyal.  “As there is a lot of competition and local manufacturers are undercutting us, we want to exit this line of business.” 

There are a few ways in which Pratibha can do this. It could sell the entire business if it gets a good price, or it could rope in a strategic investor and relocate the plant to a place like Saudi Arabia, where the company is expanding its operations. “The division was set up to give us a competitive edge,” says Katyal. “That purpose has been achieved. Since it’s not adding to our EPS any more, we might as well offload it and reduce our debt.”

Well Spread

Pratibha, which started out as a Maharashtra-centric company, now gets only 40% of its orders from western India, while it gets a good 47-48% from the north, 5% from overseas, and the rest from other geographies in the subcontinent. This diversification is to ensure the company does not depend on any one region for all its orders. 

Apart from executing a ₹400-crore project for the Dubai Electricity and Water Authority, recently, Pratibha set up a subsidiary in Saudi Arabia with a local partner, Al Suwaiket. “You cannot have a 100% subsidiary in Saudi Arabia,” Katyal explains. Pratibha has a 49% stake in the Saudi company and soon, it is expected to start bidding for projects there. 

In spite of all this, Pratibha’s stock has fallen almost 40% year to date, like its peers in the industry. Kotak’s Virmani, who has a price target of ₹62, says, “This is part of the de-rating every infrastructure company has seen.” 

Possible downsides include a further deterioration in economic growth, policy inertia and the possibility of an elongated working cycle leading to more debt. The sale of the saw pipe division, if and when it goes through, will lead to a one-time pop in the stock. Sustained upward momentum, though, will come only from a consistent rise in its order flows. 

Networth Broking has a price target of ₹53 on Pratibha, while Sushil Finance expects it to be at ₹48. That presents an upside of 32% and 20% respectively, from the current market price of ₹40.

As the company will continue to benefit from increased government spending on water and urban infrastructure projects, its stock can be bought on dips.